Banking and Financial Systems
Test Preparation
Course Introduction
This course provides an in-depth exploration of the structure, functions, and roles of banking and financial systems within the modern economy. Students will examine the organization and regulation of financial institutions, including commercial banks, investment banks, and non-bank financial intermediaries. Key topics include money creation, central banking, payment systems, lending practices, risk management, and the impact of technological advancements on financial services. The course also covers the principles of financial markets and instruments, with an emphasis on how these systems contribute to economic growth and stability. Students will gain a comprehensive understanding of the interconnectedness of global financial systems and the regulatory frameworks that govern them.
Recommended Textbook
Principles of Money Banking and Financial Markets 12th Edition by Ritter
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29 Chapters
1812 Verified Questions
1812 Flashcards
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Page 2
Chapter 1: Introducing Money, Banking, and Financial Markets
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23 Verified Questions
23 Flashcards
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Sample Questions
Q1) __________ generate(s)prices whenever securities are bought or sold.
A) Financial markets
B) Financial institutions
C) The Federal Reserve
D) The Securities and Exchange Commission
Answer: A
Q2) The Federal Reserve
A) is uninvolved with banks.
B) has little impact on overall economic activity.
C) directly influences the lending and deposit creation activities of banks.
D) issues mandates telling businesses how much to invest.
Answer: C
Q3) The definition of money does not refer to
A) coins and currency.
B) the monetary economy.
C) unemployment.
D) a tool used by the central bank to influence aggregate economic activity.
Answer: C
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Chapter 2: The Role of Money in the Macroeconomy
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Sample Questions
Q1) The __________ measure of money is the only definition of money that is generally accepted as a means for payment.
A) M1
B) M2
C) M3
D) M4
Answer: A
Q2) The M1 definition of money does not include
A) demand deposits.
B) negotiable order of withdrawal accounts.
C) money market deposit accounts.
D) checking accounts with savings and loan associations.
Answer: C
Q3) Which of the following lists of assets is in the correct order from most liquid to least liquid?
A) A car, a small denomination time deposit, a dollar bill
B) Government bonds, checking accounts, parcel of land
C) Government bonds, apartment building, money market deposit account
D) A dollar bill, government bonds, a house
Answer: D
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Chapter 3: Financial Instruments, Markets, and Institutions
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71 Verified Questions
71 Flashcards
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Sample Questions
Q1) Checking accounts can be offered by
A) pension funds.
B) life insurance companies.
C) consumer finance companies.
D) savings and loan associations.
Answer: D
Q2) To the stockholder, corporate stock represents
A) a source of fixed interest income.
B) a loan.
C) ownership.
D) a guaranteed return of principal.
Answer: C
Q3) Unlike most companies, financial intermediaries
A) carry financial instruments only on the liabilities side of their balance sheet.
B) carry financial instruments only on the asset side of their balance sheet.
C) carry financial instruments on both sides of the balance sheet.
D) have no debt.
Answer: C
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5
Chapter 4: Interest Rate Measurement and Behavior
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74 Flashcards
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Sample Questions
Q1) The coupon rate is equal to the A) yield to maturity for all bonds.
B) present value of the bond.
C) real rate of return.
D) interest rate printed on the face of the bond.
Q2) If the inflation rate is expected to be 5 percent and nominal interest rate is 9 percent, then the real interest rate will be
A) 14 percent.
B) 9 percent.
C) 5 percent.
D) 4 percent.
Q3) The equilibrium interest rate rises when A) inflationary expectations increase.
B) the economy enters a recession.
C) the supply of credit increases.
D) the demand for credit decreases.
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Chapter 5: The Term and Risk Structure of Interest Rates
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Sample Questions
Q1) If one-year securities are yielding 5 percent, but the market anticipates that rates for one-year securities will rise to 7 percent, then according to the expectations theory, current two-year securities should be yielding A) 12 percent.
B) 7 percent.
C) 6 percent.
D) 5 percent.
Q2) Two-year securities are yielding 6 percent, and comparable one-year securities are yielding 8 percent. According to the pure expectations theory, the market expects next year's comparable one-year securities to yield A) 14 percent.
B) 8 percent.
C) 6 percent.
D) 4 percent.
Q3) Which of the following will have the highest yield at any point in time?
A) A five-year Aaa-rated corporate bond
B) A five-year Baa-rated corporate bond
C) A five-year C-rated corporate bond
D) A five-year U.S. Treasury bond
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Page 7
Chapter 6: The Structure and Performance of Securities Markets
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Sample Questions
Q1) An individual who arranges for buyers and sellers to exchange securities and earns a commission in return is a
A) dealer.
B) auctioneer.
C) broker.
D) underwriter.
Q2) The best known financial auction market is the A) New York Stock Exchange.
B) American Stock Exchange.
C) Pacific Stock Exchange.
D) Nasdaq.
Q3) An important implication of the idea that markets are efficient is that A) an investor can make money by buying undervalued stocks and selling overvalued ones.
B) the price of a share immediately incorporates new publicly available information that affects its value.
C) dealers can ignore some new information on a share that affects its value.
D) an investor can make above average returns in the stock market by doing careful research of public information about selected stocks.
Page 8
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Chapter 7: The Pricing of Risky Financial Assets
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Sample Questions
Q1) If an investor holds two risky assets with a perfect negative correlation, then risk A) falls to zero.
B) is increased.
C) is unaffected.
D) is reduced by 50 percent.
Q2) Because most asset yields are affected in a systematic way by economic conditions, most securities in portfolios A) have a covariance greater than zero.
B) have negative yields.
C) have covariance greater than one.
D) increase in risk as new assets are added.
Q3) Assume an asset has a 50 percent probability of yielding 10 percent and an equal probability of yielding 6 percent. The standard deviation for this asset is A) 10 percent.
B) 8 percent.
C) 6 percent.
D) 2 percent.
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Chapter 8: Money and Capital Markets
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99 Flashcards
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Sample Questions
Q1) __________ are issued with an original maturity of between one and ten years.
A) Treasury bills
B) Treasury notes
C) Treasury bonds
D) None of the above.
Q2) About what percentage of marketable national debt is held by foreigners?
A) 5 percent
B) 15 percent
C) 25 percent
D) 50 percent
Q3) A stock is expected to pay a dividend of $2.50 per share indefinitely. The stock is expected to generate a return of 8 percent in the foreseeable future. Based on this information, a fair price of this stock would be
A) $25.00.
B) $31.25.
C) $20.00.
D) Cannot be determined without additional information.
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Chapter 9: Demystifying Derivatives
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Sample Questions
Q1) The most popular floating rate in swaps is
A) LIBOR.
B) the Treasury note rate.
C) the prime rate.
D) the six-month Treasury bill rate.
Q2) The fixed rate in a swap contract is
A) a certain short rate in the market when the contract is signed.
B) a certain long rate in the market when the contract is signed.
C) negotiated by the parties in the contract.
D) the difference between stated long and short rates when the contract is signed.
Q3) The precise terms of each futures contract are
A) negotiated by the long and the short.
B) set by the short position.
C) set by the long position.
D) established by the exchange on which the trade takes place.
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11
Chapter 10: Understanding Foreign Exchange
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Sample Questions
Q1) A decrease in German Treasury interest rates, all else held constant, causes a leftward shift in the __________ euros and causes the dollar to __________ against the euro.
A) supply of; appreciate
B) supply of; depreciate
C) demand for; appreciate
D) demand for; depreciate
Q2) In comparing the returns on U.S. and German Treasury securities, investors
A) should forecast the future dollar/euro exchange rate.
B) may disregard the future dollar/euro exchange rate.
C) should assume the future dollar/euro exchange rate is the same as today's.
D) should assume the euro will depreciate if the German interest rate is above the U.S. interest rate.
Q3) Currencies of different countries are traded in the so-called A) money market.
B) foreign exchange market.
C) capital account.
D) current account.
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Chapter 11: The Nature of Financial Intermediation
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Sample Questions
Q1) Banks still have a strong comparative advantage in extending __________ to __________ businesses.
A) traded securities; small
B) non-traded loans; small
C) traded securities; large
D) non-traded loans; large
Q2) Life insurance companies, because of the __________-term nature of their liabilities, prefer to hold __________-term assets.
A) long; long
B) long; short
C) short; long
D) short; short
Q3) Consumer finance companies, because of the __________-term nature of their liabilities, prefer to hold __________-term assets.
A) long; long
B) long; short
C) short; long
D) short; short
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13
Chapter 12: Depository Financial Institutions
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Sample Questions
Q1) In 1964 a certain foreign bank opened a branch in the United States. That branch
A) has always been allowed to underwrite securities.
B) has never been allowed to underwrite securities.
C) gained the right to underwrite securities by the International Banking Act of 1978.
D) lost the right to underwrite securities by the International Banking Act of 1978.
Q2) The largest type of depository institution in the United States is A) savings-and-loans.
B) commercial banks.
C) credit unions.
D) mutual funds.
Q3) Economies of scope exist when a business becomes more efficient by A) offering fewer services.
B) offering more services.
C) becoming larger.
D) becoming smaller.
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14
Chapter 13: Nondepository Financial Institutions
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59 Flashcards
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Sample Questions
Q1) The problem of vesting and funding are avoided by __________ pension plans.
A) both defined benefit and defined contribution
B) defined benefit
C) defined contribution
D) neither defined benefit nor defined contribution
Q2) A portfolio manager for a property and casualty insurance company who anticipates a recession is likely to shift the company's portfolio into
A) short-term securities.
B) preferred stock.
C) common stock.
D) long-term corporate bonds.
Q3) Until the 1980s most private pension plans were "defined __________" plans under which the periodic employer payment into the plan was __________.
A) benefit; variable
B) benefit; preset
C) contribution; variable
D) contribution; preset
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Chapter 14: Understanding Financial Contracts
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65 Flashcards
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Sample Questions
Q1) What is the "underwriting spread?"
A) the average percentage of the total bond issue handled by a member of an underwriting syndicate
B) the difference between the price the underwriters receive and the price they pay the borrower
C) the length of time the underwriter agrees to withhold the bonds from the primary market
D) the number of financial institutions in the underwriting syndicate
Q2) Commercial banks
A) buy private placements for their own portfolio of assets.
B) help firms sell private placements.
C) sell their own private placements.
D) have nothing to do with private placements.
Q3) Only "large" firms are able to sell __________ securities, with __________ yields than the securities the small and mid-size firms can sell.
A) liquid; lower
B) liquid; higher
C) illiquid; lower
D) illiquid; higher
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Page 16
Chapter 15: The Regulation of Markets and Institutions
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Sample Questions
Q1) There is __________ problem with deposit insurance as the insurer shares disproportionately in the __________ risk of banking.
A) an adverse selection; upside
B) an adverse selection; downside
C) a moral hazard; upside
D) a moral hazard; downside
Q2) Among the state nonmember banks, __________ have federal deposit insurance through the FDIC.
A) all
B) virtually all
C) a minority
D) none of them
Q3) Must a corporation inform the SEC when it borrows from a commercial bank or through the private placements market?
A) Only from the private placements market
B) Only from the commercial bank
C) From both
D) From neither
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17
Chapter 16: Financial System Design
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Sample Questions
Q1) Eastern Europe is an information-__________ environment, which __________ the use of securities markets for large-firm financing.
A) poor; encourages B) poor; discourages
C) rich; encourages D) rich; discourages
Q2) The United States and the United Kingdom are two major __________-oriented systems.
A) securities
B) equities
C) banking
D) markets
Q3) Stocks and bonds issued in markets-oriented financial systems are rather __________ because they are traded __________.
A) liquid; frequently
B) liquid; infrequently if at all
C) illiquid; frequently
D) illiquid; infrequently if at all
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18
Chapter 17: Who's in Charge Here?
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Sample Questions
Q1) Which of the following is an accurate statement regarding the evolution of the Federal Reserve System?
A) The independence of the Federal Reserve has been systematically eroded by legislation.
B) The Federal Reserve has shifted from an agency controlled by the states to a federally controlled agency.
C) The Federal Reserve has shifted from a fiscal policy agency to a monetary policy agency.
D) The Federal Reserve has shifted from a regional service agency to a national policy-making institution.
Q2) All twelve Federal Reserve Bank presidents
A) attend Federal Open Market Committee Meetings.
B) vote on decisions regarding the discount rate.
C) vote on decisions regarding the prime rate.
D) vote on decisions regarding bank reserve requirements.
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Chapter 18: Bank Reserves and the Money Supply
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Sample Questions
Q1) If the required reserve ratio is .10, the demand deposit expansion multiplier is A) .1.
B) 4.
C) 5.
D) 10.
Q2) The required reserve ratio is 10 percent, and the potential change in demand deposits is $100 million. What are original excess reserves?
A) $10 million
B) $100 million
C) $1 million
D) $1 billion
Q3) Assume a required reserve ratio of .4. An increase in excess reserves of $60 can potentially lead to a demand deposit expansion of
A) $50.
B) $100.
C) $125.
D) $150.
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Chapter 19: The Instruments of Central Bankin
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Sample Questions
Q1) Assume that the M1 multiplier is 2.5. If the Federal Reserve purchases $200 worth of government securities, the money supply will
A) rise by $200.
B) rise by $500.
C) fall by $200.
D) fall by $500.
Q2) Which of the following is an administered interest rate set by the Federal Reserve?
A) The discount rate
B) The federal funds rate
C) The prime rate
D) The commercial paper rate
Q3) A sign that the Federal Reserve is moving to lower interest rates would be
A) a reduction in bank reserves.
B) an increase in margin requirements.
C) a widening gap between the Treasury bill yield and the discount rate.
D) a narrowing gap between the Treasury bill yield and the discount rate.
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21
Chapter 20: Understanding Movements in Bank Reserves
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Sample Questions
Q1) Which of the following appears as an asset on the Federal Reserve's balance sheet?
A) Capital accounts
B) U.S. Treasury deposits
C) U.S. government securities held under repurchase agreements
D) Federal Reserve notes outstanding
Q2) The Treasury runs the greatest risk of inflation when expenditures are financed by borrowing from
A) foreign nations.
B) the Federal Reserve.
C) the banking system.
D) the non-bank public.
Q3) When the Treasury borrows from the non-bank public and makes an expenditure of an equal amount, the money supply
A) rises by a multiple of the expenditure.
B) rises by an amount equal to the expenditure.
C) rises by an amount less than the expenditure.
D) is unaffected.
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Chapter 21: Monetary Policy Strategy
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Sample Questions
Q1) The supply of and demand for bank reserves determines the A) Treasury bill rate.
B) prime rate.
C) discount rate.
D) federal funds rate.
Q2) Which of the following is an interest rate target specified in the FOMC directive?
A) Discount rate
B) Treasury bond rate
C) Federal funds rate
D) The prime rate
Q3) The FOMC directive contains a target growth rate for A) nominal GDP.
B) real GDP.
C) the inflation rate.
D) M2.
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Page 23
Chapter 22: The Classical Foundations
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Sample Questions
Q1) In the Classical view, inflation is the result of A) excessive monetary growth.
B) speculation.
C) government spending.
D) natural disasters.
Q2) The theory of "rational expectations" is most closely associated with
economists.
A) Classical
B) Keynesian
C) Monetarist
D) New Classical
Q3) In the Classical model, aggregate demand determines the A) level of real output.
B) the level of employment.
C) the price level.
D) the velocity of money.
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Page 24
Chapter 23: The Keynesian Framework
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Sample Questions
Q1) If consumption behavior can be described as C = 50 + .8Y, then the saving function is
A) S = 50 + .2Y.
B) S = -50 + .2Y.
C) S = -50 + .8Y.
D) S = 50 + .8Y.
Q2) As part of the "exchange rate effect of monetary policy," a higher money supply causes __________ of the domestic currency and thus __________ net exports.
A) appreciation; rising B) appreciation; falling C) depreciation; rising D) depreciation; falling
Q3) In Keynes' concept of the liquidity trap,
A) monetary policy becomes more effective as interest rates fall below normal.
B) people wish to hold more bonds as interest rates fall below normal.
C) people wish to hold fewer bonds as interest rates fall below normal.
D) there is a need for more liquidity in the banking system.
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Chapter 24: The ISLM World
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Sample Questions
Q1) A higher price level causes us to
A) move up along an aggregate demand curve.
B) move down along an aggregate demand curve.
C) shift the aggregate demand curve to the right.
D) shift the aggregate demand curve to the left.
Q2) Which of the following will change the position of the IS curve?
A) An increase planned investment spending
B) An increase in interest rates
C) An increase in money demand
D) An increase in the money supply
Q3) At __________ income levels on the LM curve, the interest rate must be
A) higher; lower
B) lower; higher
C) higher; unchanged
D) higher; higher
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Chapter 25: Money and Economic Stability in the ISLM World
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Sample Questions
Q1) Real economic activity at full employment is unaffected by changes in investment spending when
A) interest rates are low.
B) velocity is flexible.
C) inventories are low.
D) prices are flexible.
Q2) "Partial" crowding out of fiscal policy occurs when the
A) LM curve is horizontal.
B) LM curve is upward-sloping.
C) LM curve is vertical.
D) IS curve is vertical.
Q3) When money supply __________, the real rate of interest __________.
A) increases; falls
B) increases; rises
C) decreases; rises
D) increases; remains unchanged
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Chapter 26: An Aggregate Supply and Demand Perspective on Money and Economic Stability
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Sample Questions
Q1) Monetarists argue that an exogenous fall in investment spending leads to A) declining real output.
B) declining money supply.
C) declining velocity.
D) declining interest rates.
Q2) A relatively steep aggregate demand curve indicates that A) velocity is relatively constant.
B) the economy is near full employment.
C) inflation is relatively high.
D) spending is insensitive to changes in the price level.
Q3) An increase in inflationary expectations __________ interest rate.
A) raises the natural
B) raises the nominal
C) lowers the natural
D) lowers the nominal
Q4) Keynesians believe that to help ensure full employment production, we should use
A) both counter-cyclical monetary and fiscal policy.
B) a money supply rule and counter-cyclical fiscal policy.
C) counter-cyclical fiscal policy only.
D) counter-cyclical monetary policy only.
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Chapter 27: Rational Expectations: Theory and Policy
Implications
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Sample Questions
Q1) Contractual inflexibility is most likely to slow price adjustment in the A) money market.
B) capital market.
C) real estate market.
D) labor market.
Q2) An unannounced increase in the money supply will increase both prices and real GDP under
A) neither rational nor adaptive expectations.
B) rational but not adaptive expectations.
C) adaptive but not rational expectations.
D) both adaptive and rational expectations.
Q3) Adaptive expectations are "__________" according to the New Classical economists because they __________ information it is possible to use in making a forecast.
A) rational; include all
B) rational; exclude some
C) irrational; include all
D) irrational; exclude some
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Chapter 28: Empirical Evidence on the Effectiveness of Monetary Policy
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Sample Questions
Q1) The Federal Reserve econometric model estimates that a 1 percent increase in government spending, with the money supply held constant, will
A) increase real GDP by 1 percent per year for two years.
B) increase real GDP by 2 percent per year for two years.
C) decrease real GDP by 1 percent per year for two years.
D) have no effect on real GDP.
Q2) Empirical studies on velocity and money demand have limited usefulness for monetary policy because they often ignore
A) money supply effects.
B) interest rate effects.
C) inflation effects.
D) lags in monetary policy.
Q3) Keynesian models involve considerable efforts to explain the determinants of A) the money supply.
B) aggregate supply.
C) liquidity preference.
D) the demand deposit multiplier.
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Page 30
Chapter 29: Tying It All Together
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Sample Questions
Q1) Good news about an economic indicator __________ the denominator and __________ the numerator in the stock price valuation formula.
A) raises; raises
B) raises; lowers C) lowers; raises
D) lowers; lowers
Q2) "Good news" about an expenditure-related indicator drives bond prices __________ and stock prices __________.
A) up; up
B) up; down
C) down; up
D) down; down
Q3) An unexpected fall in GDP growth should send bond prices __________ and stock prices __________.
A) up; up
B) up; down
C) down; up
D) down; down
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